Refinancing Worries: When Consolidating Your Bills May Not Be Your Best Option
Refinancing used to be a standard move when it came to credit repair. Roll over multiple high interest debts into one, lower interest obligation. Now, with the recent worries in the financial market, and the slowing economy, refinancing debt may not be a wise move. Here are two scenarios in which debt consolidation can do more harm than good.
Scenario 1: Refinancing High-Interest Credit Card Debt Using Home Equity
This scenario has been commonly used by many companies claiming that they can lower your credit card debt. By taking out a second mortgage using home equity, a person can pay off high interest credit card debt with the funds received. There are several problems with this scenario:
You must have equity in your home to qualify. This means that for new homeowners, this type of financing option is unavailable. However, in the current market, this is actually a good thing and here’s why:
Financing credit card debt through a mortgage trades an unsecured debt for a secured debt. This means that when you use the mortgage money to pay off credit cards, you’ve essentially tied your homeownership into your ability to pay off the debt. If for some reason you default on the second mortgage, you can lose your house. While credit card debt and late payments may be damaging to your credit, they are unsecured. The credit card company can’t take away your purchases made with the card, but the bank can and will take away your home if you default on a mortgage.
The last problem with this type of scenario is that it is not foolproof – if you decide to use your credit cards again for purchases, then your debt problem doubles. Many times, people who try to eliminate credit card debt end up with more credit worries as they have to make payments on two mortgages and the new credit card charges.
Scenario 2: Consolidating Student Loans
If you are making payments on multiple student loans, consolidating those loans can seem like a smart idea. In some cases it is, however, if you are still in school there are better options available.
- Forbearance – if you are unable to make payments, you may qualify for forbearance. There are several types of forbearance, including one that applies if you are not making enough money to meet all of your financial obligations.
- Deferment – this is usually the best option if you are still in school. Even if you are only taking classes half time, you can get a deferment on student loan payments. Just be sure to have your school verify that you are attending, and continue to take enough courses to qualify for in-school deferment.
Once you consolidate your current student loans, you cannot reconsolidate at a later time. Therefore, if there is a chance you will be taking out further student loans, your best bet is to use forbearance or deferment options, and only pay the interest on the loans until you are able to meet the financial obligation.
If you are in debt and are looking for ways to repair your credit, you should explore every possible option, not just debt consolidation. Credit repair companies, or financial assistance through other means may be a better option in the long run for repairing and preserving your credit score.
Related posts:
- Student Loans and Your Credit – How IBR Can Help With many students facing poor job prospects upon graduation along...
- Why Debt Consolidation Loans Don’t Work Before the collapse of the housing market, consolidating debt through...
Related posts brought to you by Yet Another Related Posts Plugin.
